First conceived in the early 1990’s, Terminal 3 at Manila’s Ninoy Aquino International Airport was supposed to be part of a master plan to give the Philippines a modern, internationally-competitive air transport hub in Southeast Asia. Developed under one of the region’s first Build-Operate-and-Transfer laws, one that had proven remarkably effective in helping the country overcome a critical shortage of electrical power during the term of President Fidel V. Ramos, the centerpiece of the new airport should have been the Philippines’ ticket out of third-world status. Things did not quite go as planned. NAIA-3’s major investor, the German airport operator Fraport AG, soon found itself in a messy tangle of political and professional rivalries, deceit, corruption, and mismanagement, and to this day – nearly 20 years after the airport project was first discussed, and more than a decade since Fraport became involved – the company has yet to see a single cent of the estimated $400 million it invested in the project. This case study traces the history of the NAIA-3 project and its regrettable aftermath, illustrating a few lessons every company considering investing in developing economies should take to heart.

1. Fraport AG and the NAIA-3 Debacle:
A Case Study
by Ben Kritz

2. Fraport AG and the NAIA-3 Debacle: A Case Study is a GR Business Online publication
© 2011, GR Business Online. All Rights Reserved.

3. Abstract
First conceived in the early 1990’s, Terminal 3 at Manila’s Ninoy Aquino International Airport
was supposed to be part of a master plan to give the Philippines a modern, internationally-
competitive air transport hub in Southeast Asia. Developed under one of the region’s first
Build-Operate-and-Transfer laws, one that had proven remarkably effective in helping the
country overcome a critical shortage of electrical power during the term of President Fidel V.
Ramos, the centerpiece of the new airport should have been the Philippines’ ticket out of
third-world status.
Things did not quite go as planned. NAIA-3’s major investor, the German airport operator
Fraport AG, soon found itself in a messy tangle of political and professional rivalries, deceit,
corruption, and mismanagement, and to this day – nearly 20 years after the airport project
was first discussed, and more than a decade since Fraport became involved – the company
has yet to see a single cent of the estimated $400 million it invested in the project. This case
study traces the history of the NAIA-3 project and its regrettable aftermath, illustrating a
few lessons every company considering investing in developing economies should take to
heart.

4. 1
Introduction
On November 16, 2011 the High Court of Singapore rejected an appeal by the Philippines
International Air Terminal Corporation (PIATCO) against a ruling by the Singapore-based
International Chamber of Commerce (ICC) Court of Arbitration, which had denied PIATCO’s
claim to $564 million in compensation from the Philippine government for the latter’s
nullification of PIATCO’s contract to build and operate a new terminal at Manila’s Ninoy
Aquino International Airport (NAIA).1
While the current government of President Benigno S.
Aquino III was predictably satisfied with the outcome, there was nevertheless a clear tone of
uncertainty behind presidential spokesman Edwin Lacierda’s suggestion that PIATCO
“should just give up” on pursuing further legal actions.2
Since its conception in the early
1990’s, the project to build and operate Terminal 3 at NAIA has been a thorn in the side of
four Philippine administrations over a span of nearly two decades. Mr. Lacierda and the
Administration he speaks for can certainly hope the way is now clear for NAIA-3 to be put to
the purpose for which it was intended without further controversy. The number of lingering
issues surrounding the project, however, suggests that optimism may be premature.
One of those lingering issues is the claim of Fraport AG, the operator of Germany’s largest
airport at Frankfurt-am-Main and a principal investor in
the NAIA-3. As of November 2011, Fraport’s most recent
claim for compensation from the Philippine
government – an amount somewhere between $425
million and $800 million – for its losses in the ill-fated
project is pending before the World Bank’s
International Center for the Settlement of Investment Disputes (ICSID) in Washington, D.C.
The experience of Fraport AG in the NAIA-3 project is not only a case study illustrating the
toxic, deeply-dysfunctional business and political environment foreign investors face when
doing business in the Philippines in particular, but is an object lesson for any business
considering expansion into developing economies. By examining the chain of events,
business investors and policymakers alike may take away lessons that can help them avoid
costly pitfalls that ruin reputations and prevent productive development.
1
J.R. San Juan, “Singapore Court affirms ruling vs. Piatco,” Business Mirror, 16 November 2011.
2
M.M. Gonzalez, “Palace tells Piatco: Time to move on,” Business Mirror, 17 November 2011.

5. 2
The Need for New Airport Facilities
Expansion and
upgrading of the Ninoy
Aquino International
Airport was a critical
component of the 1993-
1998 Medium-Term
Development Plan
created by the
government of
President Fidel V.
Ramos, who took office
in mid-1992. The
Philippines’ only
international air
gateway was in dire condition, altogether unsuitable for a country hoping to join its regional
neighbors as another “Asian Tiger.” The airport at the time consisted of two terminals, the
international terminal (now known as NAIA-1) opened in 1981, and a small domestic terminal
that had been built in 1948; between them the terminals had a design capacity of 6.3 million
passengers per year, but by 1992 passengers numbers had passed eight million passengers
per year and were increasing at about 11% per year.3
The Medium-Term Development Plan envisioned the
replacement of both of NAIA’s terminals as had been
recommended by a French-government funded review of
NAIA conducted by Aéroports de Paris (ADP) in 1989-1990,
so it was here that the idea that would eventually develop
into the ill-starred NAIA-3 project was first conceived. The
immediate priority, however, was placed on developing a
replacement for the old domestic terminal and carrying out
some much-needed related infrastructure improvements
around the airport such as apron and taxiway upgrades, a
new waste-water treatment facility, and better road access
to the airport.
That project would be the new NAIA Terminal 2, colloquially
known as NAIA-2 or the “Centennial” Terminal (it formally opened in 1998, the centennial of
3
JICA NAIA Terminal 2 Project Assessment Report, September 2002.

6. 3
the Philippines’ independence from Spain). ADP originally designed it as a domestic-only
terminal – the future NAIA-3 would be dedicated to international flights – but modified the
design to manage both domestic and international service. Design and construction costs
were financed by a 30-million franc ($5.34 million) soft loan from the French government
and an 18.12 billion yen ($165.93 million) Official Development Assistance (ODA) loan from
Japan in August 1993. Because of the expanded design, construction took almost two years
longer than planned, but was completed slightly under budget, and the terminal was
formally turned over to the Manila International Airport Authority (MIAA) on December 28,
1998.
Even before construction began on NAIA-2, President Ramos was aggressively lobbying the
Philippines’ most important power brokers – the Filipino-Chinese taipans – to develop
proposals for the construction of the second new terminal called for by the ADP master
plan.4
It was, as one commentator has said, an appeal to patriotic duty as much or more
than an offer of a potentially-profitable business opportunity,5
but it was fundamentally
practical from Ramos’ perspective; having just committed the government to large debts –
albeit ones with friendly terms – for the construction of part of the new airport, financing
the second part of the master plan with further debt was politically risky. Instead, Ramos
could employ a tool that had so far proven remarkably effective in helping the Philippines
recover from a crippling shortage of electricity supply: the Build-Operate-Transfer (BOT)
Law.
Development of the BOT Law
Republic Act 6957, the Build-Operate-Transfer (BOT) Law, was passed by the Philippine
Legislature in 1990 as a solution to chronic budget constraints and lack of resources for
development.6
The general arrangement of a BOT agreement under RA 6957 was one in
which the contractor finances and builds an infrastructure facility, and then operates the
facility for a fixed term of years (up to 50) to recover investment and operating costs, plus a
reasonable rate of return. At the end of the agreed operation period, the facility would be
turned over to the appropriate government agency or local government unit.7
Under RA
4
N. Lagustan, “Farolan mistaken; Ramos pushed airport dev’t.”, The Philippine Daily Inquirer, 9 May 2011.
5
R.J. Farolan, “Impossible Dream”, The Philippine Daily Inquirer, 17 April 2011.
6
Zambrano & Gruba Law Offices, “Public-Private Partnerships in the Philippines: A Practical Guide for
Business”, Legal Update, 10 January 2011.
7
M.F. Villamejor-Mendoza, “Equity and Fairness in Public-Private Partnerships: The Case of Airport
Infrastructure Development in the Philippines”, Philippine Society for Public Administration (PSPA), 17 August
2011.

7. 4
6957, two schemes were offered: Build-Operate-Transfer (BOT), and Build-and-Transfer (BT).
Because some projects might not be suitable for either of these two programs, RA 6957 was
amended in May 1994 by Republic Act 7718, which added several new options for private
sector participation in infrastructure development8
:
 Build-Own-and-Operate (BOO)
 Build-Transfer-and-Operate (BTO)
 Build-Lease-and-Transfer (BLT)
 Contract-Add-and-Operate (CAO)
 Rehabilitate-Own-and-Transfer (ROT)
 Rehabilitate-Own-and-Operate (ROO)
 Develop-Operate-and-Transfer (DOT)
In addition, RA 7718 provides for other private-public partnership arrangements such as
service or management contracts, leases, or concessions, as well as provisions for cost-
sharing and other incentives, and a framework for market-based rate and fee setting (with
the exception of natural monopolies and public services, whose rates are regulated
externally) to ensure attractive rates of return on projects. The amended BOT law also
permits the acceptance of unsolicited proposals, provided they meet the conditions that,
“(1) such projects involve a new concept or technology and/or are not part of the list of
priority projects, (2) no direct government guarantee, subsidy or equity is required, and
(3) the government agency or local government unit has invited by publication, for
three (3) consecutive weeks, in a newspaper of general circulation, comparative or
competitive proposals and no other proposal is received for a period of sixty (60)
working days.... In the event another proponent submits a lower price proposal, the
original proponent shall have the right to match that price within thirty (30) working
days.”9
This would be the framework under which the NAIA-3 project was developed and presented
to the government, discussions about which were already well under way when RA 7718 was
signed into law by President Ramos.
8
BOT Center, “The Philippine BOT Law R.A. 7718 and its Implementing Rules & Regulations”, Republic of the
Philippines Department of Trade and Industry, January 2011.
9
RA 7718, Section 12.

8. 5
The “Emerging Dragons”
In September 1993, a group of six of the Philippines’ most powerful businessmen
accompanied President Fidel Ramos on a state visit to China, and it was there that the
proposal for the construction of NAIA-3 was first discussed with Ramos and his key
advisors.10
This luminary group of taipans included Lucio Tan,
chairman of the Lucio Tan Group of Companies with interests in
liquor, tobacco, banking, real estate, and, significantly, owner of
Philippine Airlines (PAL); Henry Sy, head of SM, the country’s
largest retailer, and majority owner of Banco de Oro and China
Banking Corporation;11
Alfonso Yuchengco, a former ambassador
to China and head of the Yuchengco Group of Companies that
included, among other businesses, Rizal Commercial Banking
Corporation, the country’s largest commercial bank; George K. Ty,
founder of the Philippines’ second-largest bank, Metropolitan
Bank and Trust Company; Andrew Gotianun, head of the major
real estate developer Filinvest Development Corporation and East-
West Bank; and John Gokongwei, Jr., chairman of JG Summit
Holdings, with varied business interests that would, from 1996 onwards, include Cebu Pacific
Airlines, which has since surpassed Tan’s PAL as the country’s largest airline.
Encouraged by Ramos, the taipans formed Asia’s Emerging Dragon Corporation (AEDC) with
Yuchengco as its chairman for the express purpose of developing a project proposal for a
new, large-capacity terminal to replace the outdated NAIA-1 and complete the master plan
for the airport. On October 5, 1994, AEDC submitted an unsolicited proposal for a 10 million
passengers-per-year Terminal 3 to the Department of Transportation and Communications
(DOTC). In March 1995, the DOTC endorsed the AEDC proposal to the Investment
Coordinating Council (ICC) for further study.12
In November 1995, AEDC sought a meeting with President Fidel Ramos, and secured his
approval for the terminal project. Strictly speaking, Ramos’ approval was just the signal for
the appropriate government agencies to begin the bidding and contract process for NAIA-3,
and not necessarily a specific endorsement of AEDC. AEDC, however, had several good
reasons to believe the project would be awarded to their group. Ramos – at least according
to his spokesman in a reply to a critical editorial in 201113
– had been the one to first raise the
10
J.P.E. Andaquig, “Corruption Still Haunts Arroyo Presidency”, Bulatlat, March 23-28, 2003.
11
The China Banking Corporation takes its name from the fact that it was originally founded to serve Chinese
and Chinese-Filipino customers and businesses in Manila in 1920.
12
Villamejor-Mendoza, 2011.
13
Lagustan, 2011.

9. 6
subject of the NAIA-3 project with the taipans, and his formal approval in November 1995
carried some weight by the President’s being the ex officio head of the National Economic
Development Authority (NEDA) Board. Having been the first to present a project proposal
gave AEDC original proponent status, giving the group an advantage in the Swiss challenge
bidding process to which the project would be subjected. And the AEDC group had a
formidable array of resources, financially and politically, that they could apply to winning the
project.
The “Other Guys”
On February 13, 1996, the NEDA Board granted first pass approval of the project as
conceived by AEDC. On September 20, 1996, a challenge bid was received from a consortium
comprising People’s Air Cargo (Paircargo) owned by Vic
Cheng Yong; Warehousing Co., Inc.; Philippine Air Ground
Services; and Security Bank and Trust Co. Cheng Yong was
the owner of the largest customs bonded warehouse
business at the airport and a former college classmate of
Lucio Tan.14
On October 16, less than a month after receipt of the
Paircargo group’s bid, the Prequalification, Bids and
Awards Committee (PBAC) of the DOTC/Manila
International Airport Authority (MIAA) opened the
financial proposals to the government from AEDC and
Paircargo and Associates. The bids for the construction of
the terminal were the same at $350 million, but Paircargo
and Associates were offering the government concession payments of Php 17.75 billion over
a 27-year period, while AEDC’s proposal was for a mere Php 135 million for the same amount
of time.15
Being ambushed by a bunch of relative upstarts came as a nasty surprise for AEDC, but
matching Paircargo’s extraordinary bid was apparently out of the question; in a breakfast
meeting between AEDC’s Tan and Cheng Yong just days after the opening of the bids, Tan
reportedly told Cheng Yong that Paircargo “was very silly to have submitted such a high
financial offer of annual guaranteed payments to the government. He [Tan] considered such
14
R. Landingin, “The Battle for Manila’s Gateway”, Newsbreak, 14 September 2007.
15
P. Wallace, “NAIA-3 to Open in December?” The Wallace Report, September 2002; Andaquig, 2003.

10. 7
substantial payments a waste of money and urged that Paircargo & Associates simply withdraw
its bid”, even offering to reimburse Paircargo its Php 150 million bid bond if it did so.16
Paircargo and Associates’ financial capacity to undertake the project, however, was rather
misrepresented. The financial requirement for the NAIA-3 project was 30% of the bid
amount, or Php 2.73 billion; because of a legal restriction on the amount of equity a bank
(Security Bank in this case) could invest in a single project, the Paircargo group reportedly
only had between Php 558 million and Php 925 million in hand, not enough to actually be a
qualified bidder for the project.17
This point would lead to serious legal problems for PIATCO
in years to come.
Those problems, however, were still in the future. In October 1996, no matter how much the
Ramos government may have wished or assumed that AEDC would be building the new
terminal, it had no choice but to award the contract to Paircargo and Associates.
PIATCO Enters the Picture
On February 27, 1997 the Securities & Exchange Commission (SEC) issued a Certificate of
Registration for Philippine Air Terminals Co. Inc. (PIATCO). The Cheng Yong-led Filipino
group comprising Paircargo, Security Bank and Trust Company, Equitable Banking Corp.,
Chuah Huh Holdings Company, and Philippine Airport Ground Services (PAGS) initially held
80% of the shares of PIATCO, while 10% were owned by another Filipino company, SB Airport.
Fraport AG of Germany would take an initial 25% ownership stake in PIATCO from the
Paircargo group in 1999 (which had been raised to 30% by 2001), while the Japanese zaibatsu
Nissho Iwai owned the final 10% of the company.18
The ownership of PIATCO thus reflected –
on paper at least – the constitutionally-required 40% limit on foreign equity in Philippine
businesses.
In an attempt to forestall their loss of the NAIA-3 project, AEDC filed a lawsuit on April 18,
1997 in the Pasig City Regional Trial Court against the members of the DOTC/MIAA PBAC and
the head of the PBAC Technical Committee, Pantaleon Alvarez, who would later briefly – and
controversially – be DOTC Secretary under President Gloria Macapagal-Arroyo, charging
16
Landingin, 2007.
17
Landingin, 2007; Villamejor-Mendoza, 2011. RA 7718 (Section 5.4c) does not fix an amount of financial
capacity, but leaves this to the discretion of the LGU or concerned government agency on a case-by-case basis.
18
Wallace, 2002; Landingin, 2007. The deal struck between PIATCO and Fraport was complex; some of Fraport’s
stake in PIATCO was indirect, obtained through taking 40% of both PAGS Terminal, Inc. (PTI), and PAGS
Terminal Holdings, Inc. (PTH).

11. 8
them with collusion and gross malfeasance in awarding the NAIA-3 bid to the Paircargo-
PIATCO group of Vic Cheng Yong. The case is still pending at the RTC by July 12, when the
concessionaire contract was signed between the DOTC/MIAA, represented by DOTC
Secretary Arturo Enrile, and PIATCO represented by Henry Go.
1998-2002: Controversy and Conspiracies
The involvement of Ramos’ successor, President Joseph Estrada, in modifications made to
the NAIA-3 project contract has never been fully explained, but it was during his brief term in
office that amendments which would eventually lead to the contract’s scuttling by President
Gloria Macapagal-Arroyo were made. The first of these amendments was made in November
1998, a second just a week after the NEDA Board granted second pass approval on the
contract in August 1999, and a third in September 2000, after Takenaka Corporation of
Japan had been granted the construction contract for the Skidmore, Owings & Merrill-
designed terminal building.
Movie actor-turned-politician Estrada was hounded by
corruption allegations and a serious downturn in the
Philippine economy and forced from office in 2001, replaced
by Arroyo, his Vice-President. In addition to having Estrada
quickly arrested and jailed on plunder charges,19
the Arroyo
Administration conducted a review of many of the contracts
and projects undertaken during Estrada’s truncated term in
office; as a result of that review, a final amendment to the
NAIA-3 contract was added on June 22, 2001, which
essentially confirmed the various changes made since 1997
and the “operate” part of the BOT agreement, whereby
PIATCO would have a 25-year concession to operate NAIA-3
and recover its investment before turning it over to the
government of the Philippines.
Sometime in early 2002, the Arroyo Administration raised the idea of buying out Fraport’s
stake in PIATCO immediately for $400 million, a suggestion to which Fraport, which had
invested about $375 million in the project to that point, was agreeable, particularly since
19
After a lengthy legal battle, Estrada was eventually convicted by the Sandiganbayan, the Philippines’ special
court for graft and corruption cases, and sentenced to life imprisonment in September 2007. In a controversial
move, Arroyo pardoned Estrada the following month. Thus politically rehabilitated, Estrada ran for President
again in 2010, finishing a surprising second to election winner Benigno S. Aquino III.

12. 9
Arroyo’s office reportedly raised the possibility that
Fraport could return and operate the terminal
under a new sub-contract.20
Arroyo ordered the
formation of a committee to study the buyout
proposal, and it was at this point that the entire
project began to go sideways.
The story the Philippine public heard was that in
the course of reviewing the NAIA-3 project and
contract, the Presidential committee discovered dozens of anomalous provisions. This led to
a “Blue Ribbon Committee” investigation in the Senate, where the anomalies were laid out;
among other things, now-acting DOTC Secretary Pantaleon Alvarez was accused of having
used his knowledge of the project in his former role as head of the PBAC Technical
Committee to form a new company called Wintrack in October 1999, which was awarded a
major sub-contract for site development and excavation work.21
To make matters worse,
many of the board members of PIATCO, including a couple of officials from Fraport, were
also board members of Wintrack. Hounded by controversy and
facing graft charges before the Ombudsman, Alvarez was denied
confirmation as DOTC Secretary by the Commission on
Appointments, and left public service (the graft case was later
dropped for lack of evidence22
). President Arroyo was then left
with no choice but to declare the contract void, and order the
government to take over the nearly-completed terminal.
The whole story, however, was not quite so simple. After the
withdrawal of AEDC’s case against Pantaleon Alvarez and the
PABC in April 1999, Lucio Tan began looking elsewhere for
airport-related business and in 2000 the Tan Group’s MacroAsia
opened Lufthansa Technik Philippines. But getting control of
NAIA-3 was obviously not a lost cause from Tan’s point of view; it
would give Tan a huge stake in the entire airport – Philippine Airlines was the sole tenant of
NAIA-2, MacroAsia controlled the largest part of the airport’s ground service and catering
20
Wallace, 2002; N. Cacho-Olivares, “Nixing Pancho’s $20-M demand led to GMA, SC Piatco voiding”, The Daily
Tribune, 9 June 2003. The NAIA-3 project had by this time grossly overrun its original contract cost, from $350
million to about $675 million. The offer to contract Fraport later to operate NAIA-3 in a separate deal was
widely reported, but the Administration later denied having made such a suggestion.
21
PCIJ, “Special Report – Open for Business”, Philippine Center for Investigative Journalism iReport, IX(3), July-
September 2003.
22
G.U. Quemado, “Graft charges against Phil minister dropped”, Cargo News Asia, 8 April 2002.

13. 10
business, and aircraft service through LTP was quickly proving to be another healthy income
stream. Not to mention that it would redress the largely-valid grievance Tan held against
Cheng Yong and Alvarez for what he saw as their having cheated the AEDC group out of the
project in the first place.23
That the “anomalies” quickly came to the attention of the Palace
and the Senate was no coincidence; to pressure the Arroyo Administration, the Senate, and
eventually the Supreme Court to scrap the PIATCO-Fraport contract, MacroAsia teamed up
with Miascor (NAIA’s other large ground service operation) and engaged the services of PR
firm Creative Point International, a successful operation that the latter firm highlights on its
website to this day.24
Fraport now found itself caught in the crossfire, and as a minority investor – albeit now the
largest one, and one that had shelled out several hundred million dollars – had little cover.
Complicating Fraport’s position was the size of their indirect equity stake in the project,
which could be interpreted as violating the constitutional prohibition against greater than
40% foreign ownership. PIATCO had created a new business, Philippines Air Ground Services
Terminal Inc. (PTI), to serve as the eventual operator of NAIA-3. Cheng Yong’s group, which
had very little of their own capital invested in the NAIA-3 project, had prevailed on the
German company to take a 40% equity stake in PAGS (which had a direct equity stake of 11%
in PIATCO), and through PAGS, increase PTI’s equity in PIATCO to 35%.25
Thus, even though
each of Fraport AG’s investments – in both of PAGS shareholding companies, PTI and PTH26
,
and in PIATCO directly – met the constitutional limit of no more than 40% foreign ownership
of a Philippines company, the corporate interlocking gave Fraport an effective stake of over
60% in PIATCO.27
The manner of their investments in the various component companies behind the project
suggests that Fraport’s leadership were aware that their stake in PIATCO could be
interpreted as a violation of the Philippines’ Anti-Dummy Law that protected the 40%
constitutional limitation on foreign ownership, and that they were treading carefully to try
to avoid clearly crossing the line. Given the greatly uneven balance of investment in the
NAIA-3 project – Cheng Yong’s group, despite their machinations, had only invested about
$16.5 million to Fraport’s $375 million – Fraport had good reason to find ways to guard their
23
Lucio Tan had by the end of 1999 bought out his AEDC partners, and so was effectively acting on his own at
this point.
24
Creative Point International, Inc., “An Illegal Airport Contract Nullified”, 2011.
25
Landingin, 2007.
26
See Note 18.
27
Landingin, 2007.

14. 11
stake. And the Anti-Dummy Law (Commonwealth Act 108, amended several times), does not
clearly address the sort of circumstances Fraport was in with respect to PIATCO.28
Lucio Tan, who was pressuring the government to ‘do something’ about the NAIA-3
contract, had plausible reasons to keep Fraport on board or at least have them depart on
friendly terms; as the operator of Germany’s biggest airport, Fraport had a cozy relationship
with Lufthansa29
, and given MacroAsia’s Lufthansa connection a breach with Fraport might
present potential complications.
But it would seem some officials of the Arroyo Administration had their own ideas about
how to “keep Fraport on board.” From taped conversations among Fraport officials and
attorneys obtained in 2003 by The Daily Tribune, it appears that the Administration
attempted to extort Fraport in order to keep them from getting caught up in PIATCO’s
impending doom. Arroyo’s personal attorney at that time, F. Arthur “Pancho” Villaraza,
reportedly asked Fraport for $20 million to be paid to an
‘offshore entity’ (presumably a Hong Kong account) to
cover “in the background” legal and government
services.30
Although the methodology and real motives
of Arroyo’s officials are indeed highly questionable, the
understandable wish to keep the highly-experienced
airport operator Fraport in the NAIA-3 formula faced
one insurmountable obstacle: legally, there was no way
to separate Fraport AG from PIATCO, the project
contractor of which Fraport was a component, and still
keep the contract intact. Buying out Fraport AG’s stake
in PIATCO was actually an excellent solution – the issue
of ‘effective control’ exceeding the constitutional
ownership limitation would have become moot, and the
Arroyo Administration would have been in a position to dictate to Cheng Yong and PIATCO
certain desired arrangements – such as contracting Fraport AG separately as the airport
28
CA 108, Sec. 2A provides that a violation of the law occurs when: “Any person, corporation, or association
which, having in its name or under its control, a right franchise, privilege, property or business, the exercise or
enjoyment of which is expressly reserved by the Constitution or the laws to citizens of the Philippines or of any
other specific country, or to corporations or associations at least sixty per centum of the capital of which is owned
by such citizens, permits or allows the use, exploitation or enjoyment thereof by a person, corporation or
association not possessing the requisites prescribed by the Constitution or the laws of the Philippines...” leaving it
to the courts to decide what constitutes permitting or allowing “the use, exploitation or enjoyment” of the
enterprise in question.
29
Lufthansa bought 4.95% of Fraport AG in 2005, a stake which has since increased to 9%.
30
Cacho-Olivares, 9 June 2003.

15. 12
operator. The only obvious explanation for this not happening is the personal greed of
Villaraza and others in Arroyo’s inner circle.
The ‘payoff’ scheme was spearheaded by Arroyo’s
Presidential Adviser for Strategic Projects Gloria Tan-Climaco,
who would eventually produce the damning report accepted
in its entirety by the Presidential and Senate committees in
recommending the contract be nullified. The President
herself was not directly implicated in the plot, but the
Fraport officials had discussions not only with Villaraza and
Tan-Climaco, but also Executive Secretary Alberto Romulo
and Presidential Legal Counsel Avelino Cruz, suggesting that
Arroyo was most likely aware of what was going on. The deal
was this: Fraport would pay the $20 million and help ensure
“the right partners” (i.e., most likely the MacroAsia/Miascor
group) were brought in to replace Vic Cheng Yong and his
son Jefferson. When Fraport refused, Tan-Climaco
threatened them with finding them in violation of the Philippines’ Anti-Dummy Law.31
Though nonplussed, Fraport officials held their ground, and in her Bonifacio Day speech on
November 30, 2002, President Arroyo declared the NAIA-3 contract null and void and
announced that the government would expropriate the new terminal.
A Carnival for Lawyers
PIATCO immediately filed a case before the Philippines Supreme Court in 2003 to overturn
the nullification, but was denied on four basic grounds:
1. Absence of the required financial capacity of at least 10% of the bid amount by the Paircargo
group at the time of the original bidding in 1996, in violation of the BOT Law.
This was true enough, although it was a slightly inaccurate interpretation of the BOT Law,
which reserved specification of the required capital to the concerned agency or government
unit. Fraport AG, without whom Paircargo/PIATCO realistically would not have had sufficient
capital, did not formally enter the picture until 1999.
31
N. Cacho-Olivares, “GMA ‘aide’ asked Fraport to invent evidence”, The Daily Tribune, 10 June 2003.

16. 13
As head of the PBAC Technical Committee, Pantaleon Alvarez had presumably been made
aware by Paircargo and Associates as early as 1996 that Fraport would potentially be a part
of the project, and had based his recommendation partly on that knowledge. If Alvarez had
strictly adhered to the rules, however, he should have rejected Paircargo’s bid as ineligible;
what is not known for certain and is only a matter of speculation is whether he was offered
some ‘incentive’ by Cheng Yong or the Paircargo group to bend the rules. Alvarez’
justification for finding the Paircargo bid sufficient was that the group did in fact have
adequate capital; he and PIATCO argued – unsuccessfully, as it turned out – that the
investment limitation rule that applied to Security Bank’s assets was being purposely
misinterpreted by people like Tan-Climaco to justify the “inadequate assets” charge.
2. Amendments to the 1997 Concession Agreement made under the Estrada Administration
were contrary to public policy, since they changed the contract substantially from the original
proposal for which the bid had been awarded.
This was also true. Some of the changes made included:
 A provision requiring the government to pay Php 180 million to PIATCO in the event
the construction contract was nullified by the Pasig RTC (presumably in connection
with the case filed by AEDC, although this was not exactly spelled out in the
amendment).
 A provision designating PIATCO the sole collector of fees for aircraft parking, tacking,
check-in, passenger fees, and other services in the airport.
 A significant change in the project design by allowing for a surface access road
between Terminals 3 and 2 instead of a tunnel under the airfield as originally
proposed. The contract amount was not adjusted accordingly – roads are obviously
much cheaper than tunnels – so PIATCO would have been able to pocket the
considerable difference.
 The project contract did not provide a ceiling cost from which rate-of-returns could
be calculated, as required by the BOT Law, but only a floor cost ($350 million), which
had ballooned to $675 million by 2002.32
3. Amendments in the 1997 Concession Agreement provided for a direct government guarantee
of PIATCO’s debts, which is expressly prohibited by the BOT Law and its Implementing Rules
and Regulations.
32
Wallace, 2002.

17. 14
Because the project was unsolicited, it was not eligible for government guarantees. PIATCO
took the imaginative position that Ramos’ encouragement of the formation of AEDC for the
purpose of presenting a proposal made it a de facto solicited project. Until Ramos endorsed
the project in his capacity as head of the NEDA Board, however, his involvement was off-the-
record; the project, as the proposal and bidding developed, simply did not meet the rather
clear definition of ‘solicited’ set out in the BOT Law.
4. Violation of the Anti-Dummy Law and the Constitutional requirement for Filipino majority
ownership in corporations dealing with natural monopolies and public services.
This allegation was directed against Fraport, and as already noted, the Anti-Dummy Law was
sufficiently ambiguous to allow for judicial interpretation in almost any direction.33
That the
“Anti-Dummy” issue wasn’t raised until Gloria Tan-Climaco realized that Fraport would
refuse the $20 million payoff through Atty. Villaraza is an indication that it was not the
strongest of arguments against the NAIA-3 contract. Violation of the Anti-Dummy Law was
mainly of matter of impression; PIATCO had been caught in a couple other clear legal
violations, and the extraordinary difference between the levels of Fraport’s and the
“natives’” investment in the project simply looked bad.
Finding no relief in the Philippine courts, and with negotiations on compensation from the
government going nowhere, in 2004 Fraport AG cut loose from PIATCO to file a claim
against the government for $425 million at the World Bank’s International Center for the
Settlement of Investment Disputes (ICSID) in Washington, D.C., in accordance with an
established German-Philippine agreement that investment disputes should be handled by
the ICSID. PIATCO, meanwhile, filed its own $564 million claim at the Singapore-based
International Chamber of Commerce (ICC) Court of Arbitration.
By December 2004, the Office of the Solicitor General finally got around to filing a petition
for expropriation of NAIA-3 in the Pasay RTC. The RTC issued a Writ of Possession to the
government, but ordered an initial payment of $66 million to PIATCO in accordance with the
principle – spelled out in the Supreme Court’s 2003 ruling – that PIATCO, as the builder of
the terminal, was entitled to just compensation for the facilities. Compensation to Fraport,
however, was not addressed by the ruling. The government delayed payment of the initial
$66 million compensation ordered by the Pasay RTC to PIATCO until September 2006, which
finally allowed the MIAA to take possession of NAIA-3 and complete work for its opening,
although PIATCO continued to contest ownership.
33
See Note 28.

18. 15
In August 2005 an apparent opportunity for Fraport to cut its losses in the NAIA-3 imbroglio
was presented when the Manila Hotel Corporation, owned by Manila Bulletin publisher
Emilio Yap, offered to buy Fraport’s stake in PIATCO for $200 million, half of what Fraport
had been hoping to collect from the failed government buyout. Five months of negotiations
failed to overcome what Fraport officials described as “substantial roadblocks” to
completing the sale, however, and in February 2006 the deal was off.34
In August 2007, the ICSID dismissed Fraport AG’s claim, ruling that it had no jurisdiction
because Fraport’s investments were made illegally, in contravention of the Philippines’ Anti-
Dummy and other laws, and that illegal investments are not entitled to treaty protection.
The supporting documents presented by the Philippines, however, consisted of the report
filed by Tan-Climaco, the decision of the Presidential Committee (based solely on that
report), the decision of the Senate committee (also based solely on that report), and the
Supreme Court decision (which was a ruling against PIATCO as a respondent, and not
specifically against Fraport AG). Since the report made by Tan-Climaco was apparently
prejudiced by the failed bid to extort Fraport AG, the ruling against Fraport was based on
evidence that was suspect at best. The ICSID, however, could not act on that knowledge
even if they had it, but only on what was a matter of the official records of proceedings in
the Philippines.
The virtually deserted Departures Area of NAIA-3, circa 2007. 10 years after its completion, less than half
of the terminal has been put into regular operation.
34
“Manila Hotel Corp acquires Piatco stake from Fraport – report”, Forbes.com, 29 August 2005; “Collapse of
Fraport-Manila Hotel deal won’t affect government cases — OSG”, The Philippine Star, 3 February 2006.

19. 16
Ninoy Aquino International Airport. In terms of size and passenger capacity, Terminal 3 is approximately
equal to Terminals 1 and 2 combined.
2010-onward: A Never-Ending Story?
On July 22, 2010 the ICC dismissed with finality PIATCO’s claim for compensation, ruling that
the NAIA-3 contract had been illegally obtained. This was claimed as a victory by the then
less than month-old Aquino Administration, perhaps out of relief at having at least one
nagging situation inherited from Aquino’s despised predecessor Gloria Macapagal-Arroyo
apparently solve itself. There was a clear sign that optimism might have been misplaced,

20. 17
however, when on December 23, the ICSID Ad Hoc Committee on Annulment voided the
August 2007 decision in favor of the Philippines government, allowing both parties to
present their cases again for arbitration. The intention of the
Committee’s action was to encourage the two parties to
negotiate their own amicable settlement; signals from the
Aquino government, however, indicated a certain hostility
towards contracts, valid or not, entered into with foreign
companies, and so on April 1, 2011, Fraport AG announced it was
re-filing its case against the Philippines at the ICSID.35
On May 23, the Pasay RTC issued a decision setting the
compensation due PIATCO at $175.79 million, less the $66
million already paid in September 2006. PIATCO filed an
immediate appeal against the ruling, claiming they had not been
furnished a copy of the final report of the Supreme Court’s
Board of Commissioners which had recommended the final
compensation amount (said to be $376 million). On July 22, PIATCO filed a petition before
the SC asking that Pasay RTC Judge Eugenio Dela Cruz be suspended and removed from
office for “gross ignorance and disregarded the rules of court by promulgating a decision
without giving the complainant (PIATCO) the opportunity to file its comments or objections to
an alleged ‘final report’ of the Supreme Court-appointed Board of Commissioners.”36
That move, which, if the Philippine judicial system remains true to its character, is probably
futile, may have been PIATCO’s last gasp now that the High Court in Singapore has weighed
in on the case.37
At least in the case of PIATCO, however, there is clear evidence of its
malfeasance; Fraport AG, on the other hand, may be asking itself why and how it wandered
into the bad neighborhood that is the Philippines’ business environment. One speculation
raised by critics of Fraport is that the airport operator probably knew, or at least should have
known, that Paircargo’s original bid was legally invalid, and that by getting involved with the
plan in the first place was tantamount to engaging in corrupt practices, demonstrated by
35
“Fraport takes on Philippines in NAIA-3 row again”, ABS-CBN News, 1 April 2011; B. Kritz, “Aquino Officially
Reneges on Pledge to Build Philippine Infrastructure”, GR Business Online, 22 June 2011.
36
I. Cabayan, “PIATCO slams judge”, Journal Online, 22 July 2011.
37
On July 31, 2013, the Philippines Court of Appeals did rule favorably on PIATCO’s appeal, declaring that there
was “no obvious massive structural defect” in the NAIA-3 facility to justify reducing the compensation amount due
to PIATCO for the expropriation, contrary to the government’s claims. Accordingly, the CA set the amount payable
to PIATCO at $300,206,639 less the $59,438,604 (exclusive of interest) paid in 2006, plus 6% interest, for a total as
of July 31 of $371,426,688 (Php 16.172 billion); furthermore, the CA directed that upon finality of the judgment,
the interest rate will be raised to 12% p.a. until the payment is completed. (J.R. San Juan, “CA orders government
to pay Piatco $240 million plus”, BusinessMirror, 8 August 2013)

21. 18
Fraport’s having taken advantage of loopholes to circumvent the Anti-Dummy Law. That
argument, however, tends to evaporate in light of Fraport’s refusal – at a time when their
position had become desperate – to pay a bribe amounting to only about 5% of what they
had put into the NAIA-3 project to make the PIATCO mess “go away” back in 2002.
Lessons Learned
The NAIA-3 project came to the attention of Fraport AG at a time when the company was
aggressively seeking opportunities for expansion, and to some extent ambition may be to
blame for the some of the mistakes Fraport made in the ensuing mess. Fraport seems to
have been naïve, or at least insufficiently informed, about the particular relationships of key
players in the project, such as the rivalry between Lucio Tan and Vic Cheng Yong, or the role
of Pantaleon Alvarez. Fraport also clearly had not considered an exit strategy or contingency
plans for when things started to go wrong; cost overruns and encouragement from its
partners in PIATCO to increase its level of equity investment should have been clear warning
signs, and in hindsight, Fraport should have realized they were throwing good money after
bad.
Even so, Fraport’s experience in the Philippines is like that of the wayward visitor who
wanders into the wrong part of town and gets robbed; he might be blamed for a lack of
wisdom or foresight in putting himself in the wrong place at the wrong time, but he is
nonetheless a victim of a crime. The NAIA-3 saga is fundamentally a damning indictment of
the Philippine system and the people in it. The BOT Law is actually a potentially productive
framework for investment and development, but is handicapped to the point of being
unworkable by the 40% constitutional limitation on foreign equity and a political system that
concentrates too much power in the Office of the President, almost guaranteeing that long-
term contracts will be changed mid-stream to suit political expediency. Add to that an
almost pathological greed that, sadly, appears all-too-often in well-placed individuals and a
glacially-slow legal system almost powerless to discourage such behavior, and the risks of
doing business in the Philippines become almost too great to consider.
But while these kinds of circumstances may find spectacular expression in the Philippines,
they are by no means unique to this country, and the story of NAIA-3 and the failed venture
of Fraport AG offer valuable reminders of basic steps that should be taken to protect
investments in the developing world. Taking on an experienced in-country consultant – one
who is not connected to the project in question or the people involved – can reveal
problematic political, business, and personal relationships. Any investment should have a
“stop-loss” or a “decision point” programmed into it as well; for example, Fraport’s basic
30% PIATCO stake should have suggested a limit of $105 million (plus perhaps a reasonable

22. 19
amount to allow for cost overruns) based on the awarded contract amount – once the
required investment soared past that ceiling, Fraport should have taken it for the warning
sign it actually was, and made a hard reassessment of its participation.
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About the Author
Ben Kritz is a veteran of the automotive industry with over 10 years' experience in logistics
and fixed operations management, and has moonlighted as an occasional business news
correspondent in the US and abroad for the past 25 years. Now an independent
management consultant, Ben advises a diverse group of clients across Asia in sectors as
varied as air transport, auto sales and marketing, and small- and medium-enterprise
development. His column on business and economic issues in the Philippines appears three
times a week in The Manila Times.